Don’t Let Liability Exposure Be The Grinch That Ruins Your Holiday Season

by Perkins Coie

With the holiday season quickly approaching, it’s a particularly good time to check your internal procedures. As you are certainly aware, a disappointed customer, or worse, an injured user, can assert claims against manufacturers, distributors and retailers, among others, in many U.S. jurisdictions. In this increasingly global economy, it can be more difficult than ever to make sure you are properly and fully protected against these types of risks.

1. Review your CPSC reporting process to ensure that you’re reporting potential product hazards in a timely manner.

  • The Consumer Product Safety Commission requires manufacturers, retailers and other entities to report certain types of product hazards within 24 hours after receiving reportable information. If you manufacture or sell consumer products, your business needs to make sure you have a clear process in place to evaluate product hazard information for possible CPSC reporting. The penalties for failing to report responsive information to the CPSC can be severe.
  • In certain circumstances, it’s not necessary for a consumer to have been seriously hurt (or worse) to create a reporting obligation if the product at issue contains a substantial hazard. You should ensure that your warranty, product safety, customer support and sales teams are all rained on how the CPSC defines a “consumer product” and when there may be a reporting obligation.
  • The CPSC has levied large civil penalties on businesses that fail to fulfill their reporting obligation properly for consumer products. Lack of knowledge regarding the CPSC’s reporting structure is not a defense for failing to report.

2. Review your standards compliance, especially if you’re headed into new markets.

  • It’s obviously important to make sure your product fully complies with all applicable government regulations. Harsh sanctions can be applied to companies that sell products that do not comply with all applicable regulations – including international, federal and state schemes. Those regulations can change drastically depending on where your products are sold. The United States, Canada, the EU and Australia, for example, all have varying degrees of government regulations that apply to certain consumer products.
  • Make sure you have a process in place to verify that what you’re selling fully complies with the regulatory structure for any new market you’re considering. You don’t want to be trying to figure this out after you’ve already sold the products. For example, the CPSC requires certain types of toys to undergo a rigorous testing process and certification of compliance before they can be sold in the United States.

3. Conduct a year-end review of your indemnity obligations covering your business partners, manufacturers, distributors, suppliers and other entities. Both upstream and downstream contracts may contain very broad (or unfairly narrow) indemnity obligations.

  • You should have a clearly identified inventory of your outstanding indemnity obligations. If you agreed to indemnify one of your business partners or are the beneficiary of an indemnification provision, you need to make sure you’re tracking the various obligations as you compete in the marketplace.

    Recall that an indemnification clause passes the risk of a loss from one party to the other. Indemnification clauses need to be properly drafted and should be regularly reviewed by qualified counsel to ensure that they will be enforceable if and when needed. You don’t want to agree to indemnify another party any longer than necessary. A yearly check is a good way to spot stale agreements.
  • Have you thought about your insurance requirements? While indemnification clauses can provide some protection against claims, their effectiveness depends upon your ability to enforce the indemnification. Your business partners may have limited assets to cover a judgment, be protected through corporate structuring, or be unreachable as a result of their home legal system. In such cases, the protection provided by indemnification can be remarkably meager. One way to buttress indemnification clauses is to couple them with insurance requirements. Insurance provisions can require one party to add the other as an additional insured to its insurance. This gives you a backstop against your partner either disappearing or turning out to be judgment-proof.
  • Review your company’s additional insured obligations regularly. As referenced above, many commercial contracts require one party to add another party to its insurance. You need to track these agreements carefully to make sure that you’re providing the required insurance or receiving the applicable insurance. For key obligations, you may want to see the actual underlying insurance policy, and not just a routine Certificate of Insurance. Including your insurance broker and risk management team in this process may help to ensure that all bases are covered.
  • Review disclaimers or limitations of liability that are included in your contracts. In the aftermath of a serious product-liability issue, your business partner may have experienced direct losses, such as recall costs or reputation damage. In such cases, your partner may look to you to make it whole. But you may be able to head off these claims through well-drafted provisions that limit your liability or exclude consequential damages.

4. Review your own insurance coverage to make sure that it’s in order and provides the necessary protection against product-liability risks, especially if your business is growing.

  • Review your insurance policies to ensure that risks arising from the sale of allegedly defective products, as opposed to other types of losses, are fully covered.
  • Check your insurance limits. Your insurance coverage limits need to match your exposure, with respect to your company’s size, its scope and the types of products being sold. For example, consider whether you need recall insurance. You may need to retain an outside counseling service to evaluate the risks facing your business.
  • Examine any limits on coverage – geographic and other areas of limits. Your policies need to be broad enough to cover all of your business interests.
  • Consider whether a self-insured retention makes sense in your coverage to give you lower premiums, more control over claims handling, and a bigger say in the selection of counsel.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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